MBIA INC quarterly report, Q3 FY2022

MBIA Inc. — Q3 2022 Form 10-Q

Business context and period. Unaudited results cover the three and nine months ended September 30, 2022; the filing was signed November 2, 2022. MBIA operates U.S. public finance insurance through National, a corporate segment, and international and structured finance insurance primarily through MBIA Corp. The company does not expect either insurer to write significant new business.

Financial results and position

Metric	Q3 2022	Q3 2021	Nine months 2022	Nine months 2021
Total revenue	$17 million	$72 million	$97 million	$162 million
Loss from continuing operations	$35 million	$123 million	$144 million	$290 million
Net loss	$34 million	$123 million	$143 million	$290 million
Basic and diluted loss per share	$0.67	$2.49	$2.87	$5.87
Operating cash flow	Not presented quarterly	$140 million	$359 million

Q3’s lower loss primarily reflected a $12 million loss-and-LAE benefit, compared with $125 million of expense in Q3 2021. For the first nine months, lower insurance losses and expenses were outweighed by weaker revenues, including investment valuation and realized losses. Adjusted net loss, a non-GAAP measure, was $17 million for Q3 versus $76 million, but $160 million for nine months versus $155 million. MBIA reported no income tax provision; a full valuation allowance was maintained against its net deferred tax asset.

Balance sheet at September 30: Assets were $4.015 billion and liabilities $4.864 billion; MBIA Inc. shareholders’ equity was negative $863 million. Total investments were $3.072 billion; balance-sheet cash and cash equivalents were $102 million.
Debt and obligations: Long-term debt was $2.393 billion; medium-term notes $484 million; investment agreements $273 million. Consolidated VIE notes and loans payable were $175 million. These figures include obligations at different entities and should not be treated as interchangeable measures of parent-company debt.
Claims and recoveries: Loss and LAE reserves rose to $1.047 billion from $894 million at year-end 2021. Insurance loss recoverable fell to $273 million from $1.296 billion, mainly following Puerto Rico recoveries and the transfer of remaining Zohar collateral into recovery-entity interests.
Cash flows: Nine-month operating cash provided was $140 million, investing cash provided $55 million, and financing cash used $229 million. The cash-flow statement reports ending cash and cash equivalents of $124 million; this differs from the $102 million balance-sheet cash figure, and the filing text does not clearly reconcile the presentation.
Investment marks: AFS securities had fair value of $2.106 billion versus amortized cost of $2.369 billion. AOCI was negative $314 million, compared with positive $100 million at year-end 2021, primarily reflecting higher interest rates and wider credit spreads.

Material changes and operating developments

Revenue declined year over year in both periods. Premiums earned fell, in part because a 2021 policy termination had accelerated premium recognition. Investment income increased, but gains on interest-rate swaps and other fair-value movements, investment losses, and debt-extinguishment gains varied materially between periods.
National’s nine-month segment pre-tax loss was $190 million, versus $98 million a year earlier, mainly reflecting PREPA reserve and recovery assumption changes and investment losses. Corporate pre-tax income increased to $68 million from $33 million. International and structured finance recorded a $21 million pre-tax loss, versus $223 million.
National paid $189 million of gross claims on Puerto Rico insured bonds following January and July defaults. At September 30, National reported $2.0 billion of Puerto Rico debt service outstanding in the business discussion; its detailed exposure table totals $1.959 billion. PREPA represented $944 million of debt service outstanding. The differing rounded figures reflect the filing’s presentations.
The GO/PBA restructuring was implemented in March 2022. National received approximately $1.0 billion in cash, bonds and a contingent value instrument, then made $277 million of acceleration and commutation payments; its GO and PBA insured par and debt-service exposure fell to zero.
For HTA, National received $33 million cash and a $358 million face-value contingent value instrument in July. The court entered a confirmation order on October 12; MBIA expected the plan to become effective in November, with approximately $45 million additional cash and $133 million face amount of bonds, followed by commutation intended to reduce insured HTA exposures to zero.
PREPA’s restructuring support agreement was terminated in March. Mediation was restarted through December 31, 2022, while litigation over bondholder liens and claims was allowed to proceed on an expedited basis. The court directed the Oversight Board to file a plan of adjustment by December 1.
The Zohar liquidation plan became effective in August, distributing remaining collateral to MBIA Corp. through interests in asset recovery entities. Their realizable value and timing of monetization remain uncertain. The company also classified certain acquired interests as held for sale and discontinued operations.

Liquidity, outlook and principal risks

Management expected MBIA Inc. to have sufficient cash for debt service and general corporate needs, primarily relying on National dividends and other cash inflows. Parent-company liquidity was reported as $172 million at September 30, down from $239 million at year-end. Dividend amounts from National are subject to statutory limits and regulatory approval for distributions above permitted levels; future amounts and timing are not assured.
National held $2.5 billion of cash and investments, including $731 million in cash and short-term investments. Its statutory capital was $1.948 billion and claims-paying resources were $2.896 billion. National was within aggregate risk limits but not certain single-risk limits, which could restrict new business.
MBIA Insurance Corporation held $425 million of cash and investments, of which $59 million was cash or liquid investments immediately available. It maintained the minimum policyholder surplus but lacked sufficient qualifying assets for certain reserve requirements and was not within certain single-risk limits. The NYSDFS has not approved surplus-note interest payments since 2013; unpaid interest was $1.2 billion as of October 15, 2022 on $953 million principal. The filing says no interest accrues on the deferred interest.
Management cited uncertainty in PREPA outcomes and recoveries, the possibility of additional Puerto Rico claims, and the risk that MBIA Corp. may have insufficient liquidity or resources if claims exceed expectations or recoveries are delayed. The NYSDFS could place MBIA Corp. into rehabilitation or liquidation if it concludes policyholder claims cannot be paid.
Other risks include reserve-estimate uncertainty, investment losses from interest rates and credit spreads, collateral-posting and capital-market access risks, and litigation. In specified lawsuits, MBIA could not estimate any potential loss or range of loss. The company stated it expected to prevail in actions where it is a defendant, but gave no assurance of outcome.
Management said COVID-19 had not materially adversely affected the business to date, while future effects remained uncertain. It noted elevated inflation, rate increases and the Ukraine-Russia conflict; MBIA reported no insured sovereign or sub-sovereign debt of Russia or Ukraine and immaterial direct or indirect investment exposure.

Important facts for investors to verify

PREPA plan and lien-litigation developments, and the impact of any restructuring on National’s claims, recoveries and reserves.
Whether the HTA plan became effective as expected and the value ultimately realized from its cash, bonds and contingent value instrument.
Actual collections and valuations for Zohar recovery-entity assets, and the effect on MBIA Corp.’s liquidity and statutory position.
National’s dividend capacity and MBIA Inc.’s parent liquidity relative to debt service, collateral needs and operating costs.
Loss-reserve assumptions, investment marks and the reconciliation of reported cash balances and cash-flow totals.
Regulatory status of MBIA Corp., including qualifying-asset requirements, surplus-note payment approvals and potential rehabilitation or liquidation exposure.